For all the talk about the utilities sector being negatively correlated to rising Treasury yields, the S&P 500 Utilities Index is trading just modestly lower, both on a year-to-date basis and since the Federal Reserve hiked interest rates by a quarter of a point last week.
Some exchange traded funds are doing even better than that. For example, the Invesco S&P 500 Equal Weight Utilities ETF (NYSEArca: RYU) has been essentially flat since the Fed’s announcement, and the equal-weight fund is slightly higher on a year-to-date basis.
Owing to the sector’s reputation, it’s understandable that investors are skittish about utilities stocks and funds like RYU against the backdrop of Fed tightening. However, some analysts believe that the sector offers upside going forward.
Morgan Stanley analyst Stephen C. Byrd upgraded his view on the utilities sector to “overweight” from “neutral,” highlighting six names in a note to clients out Wednesday.
“These are Overweight-rated utility stocks that offer strong execution of capex plans, above-avg. growth plans, and lower risk due to business simplification and geography,” said the analyst.
Among the RYU components that Byrd is bullish on is American Electric Power (NYSE:AEP).
“The electric utility firm is closing costly coal plants and expanding into renewables, following the lead of top utilities in the Midwest. The firm is expected to grow its earnings in line with its peers, but its stock price is trading below the level of some of its competitors. American Electric Power was issued a $112 price target, which reflects 18% upside,” reports Sarah Min for CNBC.
CenterPoint Energy(NYSE:CNP), another RYU member firm, is considered a “premium utility” by Morgan Stanley’s Byrd.
“The stock trades at a 3% premium to peers, which is too low in our view and could expand to 10% given better growth, excellent business quality, and earnings upside,” adds the analyst.
Exelon (NYSE:EXC), another RYU component, may not be getting the credit it deserves from market participants, and investors may be overlooking that utility’s increasing environmental, social, and governance (ESG) credentials.
Speaking of ESG traits, DTE Energy (NYSE:DTE) could decide to make the move away from coal. That’s another RYU component favored by Byrd. The quartet of stocks mentioned here combines for almost 14% of RYU’s roster. None of the fund’s 30 holdings exceed a weight of 3.62%.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
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